BANKING and BEER-DRINKING are NOT “EVIL”

Dear Readers: I wanted to share another wonderful piece by the Shrine’s finance expert, Professor Athena. I think the piece is especially timely, as I do not trust the Obama Administration’s targeting the banking industry, as a whole, as “evil”. I sense this administration want to take-over as many economic controls as possible, and will gin-up any crisis and vilify any entity in its quest for power.

I admire the analysis of W.C. Varones very much. I am no expert on finance and the economy, so I have learned much from his many posts (including the eye-popping fact that the Dow would have to reach 28,000,000 by 2099 as the implicit assumption CalPERS used when selling the legislature a massive pension increase in 1999). W.C. Varone’s ideas for reform are based on capitalism, the fair running of free markets, personal responsibility, and liberty. If his ideas of reform were the ones implemented, I would be content.

I do not trust the Coffee Party. Another of my compatriots, the Liberator Today, clearly proved it was a top-down lead entity that bore little resemblance to a grassroots movement. It is created by a career leftist with strong ties to the Obama administration. The cause of the foreclosure woes is not the”evil bankers” but the asinine congressmen pushing toxic legislation that forced those bankers to give out risky loans they would not have otherwise made. The local Coffee Party’s interest in banks smells fishy to me.

As for why SEIU is singling out Bank of America for thug tactics, supposedly it’s a protest of foreclosures by banks generally but Big Journalism notes that the union apparently owes BoA $90 million, which, per Easton, means $4 million in outstanding interest and fees. Terrorizing an exec’s family might make them think twice about being too insistent in collecting.

I want Obama and his SEIU minions be stopped on all action items, so that our country’s economy can not be further damaged. The “foreclosure” crisis is manufactured, and the financial reform bill just pushed through is another disaster. The administration, and the top-down-lead Coffee Party, is directing anger at bankers and NOT the congressional representatives who over-regulated us into this mess.

******************************************************************The Return of the Nobel Experiment

The reform movement during prohibition grew popular largely because of its challenge to morality. Its message of “drinking as evil” resonated among the public, shaming them into wanting to see it banned even as they continued to consume alcohol. The prohibition band is back on the bandstand in Washington, D.C., this time with the mantra of “banking as evil”.

The latest SEC investigation today probes Morgan Stanley, who unlike Goldman Sachs was not a big player in the CDO market (Collateralized Dept Obligation). It remains to be seen whether the charges against Goldman stick as a case for the courts, much less a bank whose losses during the mortgage crisis on their own balance sheet far overshadows the amount of losses incurred by any investors in CDO’s they structured. The general belief right now among financial market professionals is that most of this noise goes away with mea culpa admissions from the biggest CDO “offenders” (i.e. Goldman) and a few big fines are paid, then the sun sets on another profitable day on Wall Street.

The larger insidious picture is the one being painted by the reformers beating the tambourines to initiate prohibition on banks and their profitability. Suddenly capitalism and taking risk is not only being punished by the very nature of capital markets and their inherent volatility, it is also being punished in the court of public opinion. Going forward, the law of unintended consequences begins to take shape, and its form is far from attractive.

Just as in the period of 1920-1933 during prohibition, a different market will likely develop that will have very negative effects. One only has to surmise that assets and their management will be off-shored to more favorable regulatory and business environments (perhaps the Pac Rim and China, or India) where brokerage firms and banks and brokers who make markets in products are not being sued for doing exactly what they are in business to do. We saw this trend in manufacturing beginning in the 1980’s, where unions’ negotiations for ever-higher labor benefits along with uncapped product liability drove U.S. manufacturers off-shore. This trend now facing the financial industry can and will result in significant job losses for Americans and a much weaker GDP (Gross Domestic Product).

Jobs are only the beginning. The real harm to our economy will come in form of increasingly non-functional credit markets. As loan assets become more and more difficult to securitize in capital markets, there will be less of them. They will be more costly, and more likely to be run by the likes of Wal Mart and similar companies not subject to FDIC and federal OCC regulations as familiar banking institutions exit what was already a thinly-profitable market. Firms that choose to originate and securitize will be much less able going forward to make markets in those assets, for fear of regulatory repercussions. Leverage for inventory management will become tougher. The net result of controlling this form of “vice” is that fewer good choices and more of the bad ones will be available to consumers going forward. But, not to worry. Perhaps the federal government can then step in and run the banks in entirety, telling consumers what they can and will do with ALL of their money, as they plan to do with our health care.

Welcome to your new investment and pension management, where the government is your broker, account manager, and banker. What a wonderful world we will have when the satanic evil of bankers has been purged. Can’t you hear the beat of the drums, and the call pulling you away from the beer halls and the evils of money and into the prayer meeting?

All of the current debate would be somewhat amusing if not for its hypocrisy. The largest offenders by far at the very inception of subprime lending were FNMA and FHLMC (Fannie Mae and Freddie Mac), who blessed the alternative loan products to the tune of billions in purchases from companies such as Countrywide and WaMu, and thereby opened a floodgate of demand. By broadening the demand side of the subprime markets, they created a “spread” deal demand, quickly snapped up by Wall Street financial deal factories. Yet the largest portfolios anywhere in the world have skated through the reform conversations with barely a peep in their direction. Members of Congress as well as the President have taken huge contributions from Wall Street firms while pretending to be appalled at them. This reminds me of an old joke about why you take two Baptists fishing with you. (Punch line: If you take only one, he drinks all your beer).

It is interesting that emergency discount window lending by the Fed (are you listening Bernie Sanders???) had no bearing on the subprime mortgage markets, nor did proprietary trading on part of Wall Street or large dealer banks. Nor did derivatives in general, despite their political convenience cast as villain for the likes of Senator Blanche Lincoln and others. Real reform of the huge GSE’s to put them in the status of portfolio managers of only highest-quality loans with required cash reserves and regular examination by Congressional committee would significantly change the landscape going forward as far as risk to taxpayers. Casting banks in the role of villain and non-paying homeowners as victims is exactly the same as blaming Jack Daniels for making whiskey to victimize the poor and unfortunate intemperants.

It isn’t time to wind back the clock to Prohibition. It’s time to realize that choices always have consequences.
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MUT’s News and Notes:

The other SLOBs have excellent posts today:

Beers with Demo has a review of the scathing Amnesty International report levied at Mexico: Narrative FAIL .

A more recent post from the Liberator Today, entitled “The Nationalist Ideal” is exquisite, with this MUT-money quote:

The ideals of individual liberty and responsibility, of tolerance for other religions, of democracy, of free markets have made this nation rich. These ideals, along with a belief in the supremacy of our armed forces’ will to defend these ideals, form the basis of our nationalism. These are ideals worth defending. It is no coincidence that they are the very ideals for which we are attacked.